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Government borrowing hits record August high

• Public sector borrowing hit £15.9bn last month
• City analysts were expecting £13.2bn
• Bank of England minutes hint at more QE

Government borrowing hit a record high for an August last month, as higher spending put Britain’s public finances under renewed pressure.

And with the UK economy weakening, the Bank of England has signalled it stands ready to pump more money into the economy, possibly as soon as next month.

The government’s preferred measure, public sector net borrowing excluding the impact of banking bailouts, rose to £15.9bn last month, the highest August figure on record, and compared with £14bn a year ago, according to the Office for National Statistics. It was also higher than the £13.2bn expected in the City.

The ONS also reported that the government had borrowed less in previous months than originally thought, but City analysts warned that George Osborne is still likely to miss his borrowing targets for this year.

Borrowing in the financial year so far was revised lower by £4.6bn to £51.5bn, mainly because of a recalculation of local government data and income tax receipts, the ONS said.

The International Monetary Fund said this week that if UK growth turns out weaker than expected the government should ease the pace of its deficit reduction plans. The IMF slashed its forecast to 1.1% economic growth this year from 1.5%, and to 1.6% for 2012, down from 2.3%. Osborne has so far resisted pressure to reconsider his austerity measures.

The minutes of the Bank’s monetary policy committee meeting a fortnight ago showed all nine members voted to keep interest rates unchanged, and only one member, the American economist Adam Posen, backed more quantitative easing. However, the tone of the minutes suggests the debate is shifting towards more economic stimulus – probably before Christmas.

“For some members a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting,” the minutes said.

This “strongly suggests that QE2 is set to be launched in the very near future,” said Samuel Tombes, UK economist at Capital Economics.

Public finances under pressure

Commenting on the public finances, Howard Archer of IHS Global Insight warned that Osborne will miss his targets if the economy deteriorates.

“If the overall performance of the first five months was replicated through the rest of the fiscal year, public borrowing would come in around £127bn, compared to the targeted £122bn,” Archer said.

“However, it is highly likely that the public finances will be increasingly pressurised by muted economic activity eating into tax revenues and pushing up unemployment benefit claims, so the shortfall currently looks set to be appreciably more than this.”

Chris Williamson, chief economist at Markit, said the ONS data was a blow to the government’s deficit reduction targets.

“There seems little hope that the government will hit its spending targets this year, as slower growth means less tax revenues and higher welfare spending,” Williamson said.

Speaking before the latest public finance figures were released Danny Alexander, chief secretary to the Treasury, said the government would not be knocked off course by the IMF’s lower forecasts.

Fears over the health of the public finances were stoked this week when the Financial Times found a £12bn black hole. Its calculation, based on the Office for Budget Responsibility’s methodology, found that the structural deficit is 25% bigger than previously thought. Economists said the government would be reluctant to resort to any drastic measures such as a 2.5% VAT hike to plug the gap this year, but added it increased the chances of more cutbacks further out, with austerity likely to last into the next parliament.

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